Is Tantia Constructions (NSE:TANTIACONS) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Tantia Constructions Limited (NSE:TANTIACONS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Tantia Constructions

What Is Tantia Constructions's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Tantia Constructions had ₹732.4m of debt in March 2023, down from ₹3.38b, one year before. On the flip side, it has ₹337.5m in cash leading to net debt of about ₹394.9m.

How Healthy Is Tantia Constructions' Balance Sheet?

The latest balance sheet data shows that Tantia Constructions had liabilities of ₹4.75b due within a year, and liabilities of ₹71.4m falling due after that. Offsetting these obligations, it had cash of ₹337.5m as well as receivables valued at ₹394.5m due within 12 months. So it has liabilities totalling ₹4.09b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹327.4m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Tantia Constructions would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Tantia Constructions's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Tantia Constructions wasn't profitable at an EBIT level, but managed to grow its revenue by 8.4%, to ₹1.1b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Tantia Constructions had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₹500k. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it burned through ₹12m in the last year. So is this a high risk stock? We think so, and we'd avoid it. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Tantia Constructions is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.